An idea of the subject matter of positive international economics can be had from its definition and kinds of question that it seeks to answer, given at the beginning of this chapter. As noted earlier, international economics is essentially the study of economic interactions between the nations and the whole gamut of problems aris­ing out of it. In specific terms, the subject matter of international economics can be divided into the following parts,

The Pure Theory of International Trade. This part of international econom­ics is the study of trade theories that economists have developed over time to ex­plain the basis of international trade and the distribution of gains of trade between the trading nations. It studies also how factor earnings tend to be equal between the nations.

Foreign Trade Policy. The countries involved in foreign trade have experi­enced that free trade has not always proved equally gainful to all the trading part­ners. While some countries gain more, others gain less. Some countries even tend to lose over time. The losing nations adopt, therefore, a restrictive trade policy, called protectionist or nationalist trade policy. The countries pursuing protection­ist trade policy use direct and indirect controls on the imports, the customs being' the main weapon of indirect measures. International economics studies the causes and consequences of such policies and theory of tariffs.

Foreign Exchange Market and Exchange Rate. As mentioned earlier, cur­rency and monetary systems vary from country to country. This creates the problem of payment, i.e., the problem of settlement of international payment obliga­tions. The exchange rate between the currencies is determined in the foreign ex­change market. International economics studies working of the foreign exchange markets and the theory of exchange rate determination. While some countries pur­sue a policy of fixed exchange rate and some floating exchange rate. International economics studies also the consequences of fixed and floating exchange rates.

The Balance of Payment Problems. The economic conditions of various trad­ing nations, their ability to produce exportable surplus and to compete in the inter­national market differ widely. Therefore, it is unlikely that export earnings are always equal to their import bills. When import bills exceed the export earnings, it results iii trade deficits. When other international receipts are inadequate to meet the trade deficits, it causes balance of payment problems. International economics analyses the causes and consequences of deficits in the balance of payments. It also analyses the consequences of methods adopted to remove the balance of pay­ments disequilibrium.

International Economic Cooperation. The post-World War II period has wit­nessed a rapid increase in economic cooperation between the nations and between the groups of nations and at the world level. The economic cooperation has taken the form of economic unions, trade groupings, currency blocks formation of international organizations like International Monetary Fund, the World Bank the World Trade Organization, General Agreement on Trade and Tariffs, United. Nations Conference on Trade and Development etc. and international flow of capital. The international cooperation of various forms and kinds have a consider­able bearing on the development of trade, economic growth and stability International economics studies also the forms and consequences of international eco­nomic cooperation.

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